CFOs Play a Key Role in ERM and ESG Oversight

With the link between ESG factors and risk becoming increasingly important to stakeholders, companies must find ways to bring enterprise risk management, new departments and leaders into the ESG conversation.

With the link between environmental, social and governance (ESG) factors and risk becoming increasingly important to investors and stakeholders, companies must find ways to bring enterprise risk management (ERM), new departments and leaders into the ESG conversation.

It is also important that risk management experts including the chief financial officer, controller, auditor, general counsel, corporate secretary, human resources, corporate strategists and finance functions get up to speed on ESG. Only when finance and legal executives from many different departments and disciplines are involved in the ESG conversation can there be an enterprise-wide understanding of the environmental, social and governance risks an organization faces — and how these risks may be monitored, mitigated and proactively addressed.

Perhaps most importantly, companies are viewing ESG factors differently inside their own organizations. Addressing these issues is no longer something that can be done at every fifth board meeting or within a glossy sustainability report that ticks the box for addressing environmental or social issues. Finance executives are finally beginning to see ESG risk as financial risk. And when financial risk and ESG risk are viewed as having equal importance, then these risks can be managed and monitored to demonstrate value.

An Evolving View of ESG Risk and Value

When ESG material facts are measured and managed, sustainability, corporate responsibility or ESG disclosure can easily become a platform for your management team to talk about other facets of a company’s story that may have been historically overlooked. Boards and c-suites are now increasingly informed with defined and company-specific material ESG key performance indicators (KPIs), which may be leveraged to elevate corporate strategy, act on management goals and address short-term risks and long-term opportunities.

CFOs and finance teams are aligned with strategic and operational goals across the business including planning and resource allocation, product-development, production, sales, procurement and others in the business supply chain. As such, they are well positioned to oversee risk ownership and properly execute ERM functions.

An effective contribution to ERM involves enabling decisions and driving insights to decision makers. There are various elements to better supporting decisions in risk management. More informed risk-taking and decision-making requires high-quality information about opportunities and risks and their implications.

COSO draws a distinction between ESG disclosures and risk disclosures, “Despite an increase in ESG disclosures evidence shows that the issues reported in sustainability reports or ESG disclosures do not always align to the risks reported in an organization’s risk disclosures.”

Here are a few reasons why ESG disclosures have not historically been aligned with risk disclosures:

ESG-related risks have not typically been quantified in terms of dollars and cents. When there is no attempt to monetize ESG risks, companies may find it challenging to allocate proper resources to addressing these risks.

Proper KPIs have not been identified for ESG risks. Many companies discuss ESG risks, but have yet to identify the key performance indicators necessary for a successful, internal risk review process.

Silos can hamper communication about ESG issues. Too often, sustainability practitioners and risk managers are not in the habit of regularly communicating with one another.

Once ESG risks are viewed in ways that make them more visible and easily comparable among peers and competitors, companies can identify which ESG risks are material and how these material risks should be managed.

The Role of the CFO in Your ESG Journey

The role of the CFO in overseeing ERM is clearly coming into focus. The International Federation of Accountants (IFAC) recently published a paper titled, Enabling the Accountant’s Role in Effective Enterprise Risk Management (ERM). The paper outlines that ERM needs to be part of professional accountants’ mindsets and makeup. The report goes on to explore the contributions of accountants in effective ERM, as well as key aspects of CFO leadership needed to drive these functions.

Accountants and CFOs are becoming risk experts, working to organize a cross functional team. They are effectively providing outward-looking, decision-useful insights that will help organizations manage risk and respond to ever-changing markets, while aligning key performance metrics with long-term business strategy.

The following are key ways — detailed in the aforementioned IFAC publication — for CFOs and finance teams to elevate their contribution to ERM:

Align risk management with value creation and preservation

Drive insights and enable decisions through provisions of risk modeling and analytics, data governance and identification of organizational risk appetite

Enable integration and interconnectivity by breaking down silos across the organization to share information

There is growing consensus that companies must provide decision-useful ESG information because this information is central to institutional investors’ assessment models. Along with that consensus comes the belief that an understanding of ESG is critical to how companies run their own businesses. Because a company’s economic performance can be derailed by an extreme weather event or a lawsuit about problematic hiring practices, it is increasingly important companies examine their myriad risks through an ERM and ESG lens.

While it is imperative to understand the risks posed by ESG, it is equally important to see the opportunities that come along with understanding and managing ESG factors successfully.

DFIN’s newest ESG thought leadership paper — due out March 1, 2019 and focused on ESG Risk and Value Creation — will offer a roadmap for beginning your ESG journey by following four crucial steps:

Navigating ESG issues

Building a map

Following the ESG disclosure path

Reaching your ESG goal

Follow DFIN’s insights for more risk and compliance thought leadership around ESG, cybersecurity and artificial intelligence.

Email Newsletter

About FEI Daily

Advancing success through information, community and advocacy since 1931.

Financial Executives International connects senior-level financial executives by defining the profession, exchanging ideas about best practices, educating members and others and working with the government to improve the general economy.